January 31, 2019
The Central KYC Records Registry was set up in 2015 for storing, safeguarding, and retrieving electronic copies of KYC records obtained by banks and financial institutions from their clients was thought to be a vital catalyst in facilitating swifter onboarding of clients for the financial services industry. However, four years after the project was set up, the promise has not translated into reality owing to several bottlenecks in design and process. This includes, saliently, incorrect price structure choice, a less than 100% digital process, and the granularity and rigidity of submission rules for reporting entities.
Reorienting the design and process of the CKYC infrastructure is critical to financial inclusion and efficient delivery of financial services. Accordingly, this article will deep-dive into the issues that inhibit the operations of the CKYC registry; it will round up the discussion with two proposals for reforming the (price) structure and design that may facilitate swifter compliance with compliance processes.
1. Wrong Price Structure
At present, CKYC charges banks/FIs to upload (create) a record and update it. Illustratively:
Creation of record: INR 0.80
Updating of record: INR 1.15
It is trite that banks (and financial Institutions) incur costs in customer acquisition. User-specific records of data that they create as a result are unique and as such, are a competitive moat for their business for up-selling and cross-selling to the customer acquired as he/she continues her financial journey. Sharing customer KYC detail to the CKYC, a common repository of KYC data, is thus fundamentally at odds at with the banks’ private interests. A price-structure choice to manage that tension would charge the consuming banks/FIs of the uploaded content and pay banks/FIs to upload/update records at the CKYC. The presence of the supplier-pays model naturally would make banks/FIs disinclined to upload/update KYC data on a timely basis so that the ecosystem can actionably benefit from the submission. Since the establishment of an account relationship is linked to compliance under the Prevention of Money Laundering Act, the submission of KYC information to the CKYC has a time-critical element. Disincentives to banks/FIs in terms of upload/update costs do not help the objective of actively utilizing the CKYC infrastructure because the information cannot be assuredly up to date. The price structure should be users pay and supplier earns to align the incentives.
2. Prescriptive Submission Process:
To add to the wrong price-structure choice discussed earlier, CERSAI operating guidelines are very prescriptive for upload of records. Illustratively, the requirements respecting the upload of records need scanned documents to go with the KYC form, which is as follows:
Documents should be scanned with a resolution of 150-200 dpi
Photographs should be scanned in color mode and not greater than 20 kb-50 kb
The maximum file size for an individual record should not exceed 350 kb
These illustrative requirements will suffice to suggest the number of uncompensated man-hours that the uploading/updating bank/FI would have to incur to upload/update the records. As with the price-structure choice, one change that can unlock the right incentives is for the operating agency of CKYCR, CERSAI, to collect the supporting documents on an as-is basis from the uploading banks/FIs and then tailor them to required specs at its end through an outsourced agency. The costs may be amortized across the users of uploaded data.
Having identified two of the salient friction-points in the design, this section will suggest two reform measures that will potentially leverage the CKYC infrastructure:
1. Users Pay & Supplier Earns:
The entities downloading the records already pay under the extant structure. The price structure should be changed to compensate the supplier of data that reduces the information asymmetry to the ecosystem. Financial services know of interchange fee models for four-box card companies like Mastercard and Visa. Let’s recall that those models are premised on compensating the card-issuing banks because they incur the retention costs towards customers through rewards and tie-ups with vendors. The CKYC infrastructure can borrow from the interchange fee model and amortize that fee across the CKYC value chain. The operating agency may retain part of the costs incurred to defray the costs of managing the platform and pass on the rest to the banks/FIs uploading the data. If this design change requires that the CERSAI has the authority to independently determine the pricing in consultation with banks/FIs, those legal reforms may be introduced.
2. Move the CKYC to the Credit Bureau Model:
The nature of value-addition that CKYC infrastructure offers is similar in quality to the value-addition credit bureaus offer. A more structural reform, therefore, would be to privatize and regulate KYC services on the same lines as credit information services. That would mean we would have several KYC-services entities with their own membership specializing in several niches.
Right now, CKYC has failed to scale beyond the individual to other accounts like small businesses. Given the incentives discussed above, that looks a tough sell to banks/FIs. Having an industry structure on the lines of credit bureaus will unlock incentives to specialize in niches on the same lines as the bureaus currently are.
KYC mandates are an unavoidable incident of financial services industry owing to concerns surrounding money-laundering and terrorist financing. At the same time, the objectives are at tension with other public objectives like financial inclusion. Cost-effective KYC services that enable financial sector entities to offer products and acquire customers consistent with the AML compliance are critical to bridging the tension. The design reforms this article sheds light on should be debated within the industry and with regulators urgently.
RupeePower is a leading CreditTech company in India. RupeePower’s platform CreditOn is a comprehensive digital-first product suite that enables banks & lending companies to transform themselves into state-of-the-art digital lending enterprises at scale. CreditOn provides lenders with flexibility & scale to manage in real-time their credit decisioning criteria, sourcing channels, customer onboarding journey, underwriting workflows, and digital partner ecosystem - across the whole range of SME/retail credit. The product suite enables seamless online & offline origination with its acquisition platform, Loan CRM, customizable BRE with instant decisioning & Loan Origination System. Smart AI/ML-powered tools like KYC Box, Address Match & decisioning based on non-traditional sources of data enable paperless loan origination within a robust credit assessment framework. The CreditOn suite has consistently demonstrated a multifold increase in origination throughput for banks & lending companies while preserving (if not enhancing) portfolio quality. CreditOn has created client success across banks & lending companies with names like State Bank of India, Kotak Mahindra Bank, Standard Chartered, RBL Bank, YES Bank, Mahindra Finance, Fullerton India, AU Small Finance Bank, Edelweiss & Ujjivan Financial Services. The platform has enabled these lenders to disburse over USD 4 billion in retail and SME credit to roughly 2 million customers over the last four years.
Disclaimer: The views reflected in this article are solely of the author’s and do not necessarily reflect the views of MEDICI.
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